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China central bank urges proper management of risk

Liu Jin | AFP | Getty Images

China's central bank urged commercial banks to properly manage liquidity while reiterating its promise to keep monetary policy stable and to clamp down on risky lending, noting that the world's second-largest economy has yet to find a stable base for growth.

In its quarterly monetary policy report released on Saturday, the People's Bank of China (PBOC) said it would step up oversight of lending in risky areas such as the property sector and industries struggling with overcapacity.

The bank is trying to rein in an explosion of off-balance sheet and risky lending as cautious government regulators resist speedier financial reform that would force markets to price risk more realistically.

(Read more Will China be the 'savior' of emerging markets?)

"We will guide commercial banks to strengthen liquidity and asset liability management," the PBOC said, to make sure financial institutions are supporting the real economy rather than speculative activity.

Debt is shaping up as a major risk to China's economy. China's local governments had amassed some $3 trillion in debt as of the end of June 2013, according to official figures, stirring concerns that any defaults could trigger a financial crisis.

Beyond the publicly acknowledged debt, however, is the question of how much more is hidden in China's shadow banking sector, with its informal loans and so-called wealth management products that often promise high returns.

The recent near-default of a wealth management product, reportedly prevented by a bailout from a local government, has heightened concerns of systemic risk and moral hazard.

"We will strengthen oversight of local government debt and explore the use of market mechanisms to resolve problems in local government debt," the central bank said in the report, which mainly looks at policy operations in the fourth quarter of 2013.

However, the PBOC's attempts to curb risky lending by calibrating supply of money market funds have triggered repeated cash crunches that have roiled financial markets, most recently in January.

(Read more: How big is China's economy, really?)

The central bank has responded by moving to improve communication with the market. The PBOC now announces injections into the banking system - its short-term liquidity operations (SLO) - via a new account on the microblogging platform Weibo.

But it also kept up the verbal pressure on banks through frequent warnings that liquidity was plentiful and banks should manage it better.

In the quarterly report, the bank also reiterated its plans to advance reforms to interest rates and the currency exchange rate system, to promote a deposit insurance programme and strengthen communication with the market and the public.

While the PBOC noted that the economy is likely to remain stable, the report said that the base for solid growth is not yet stable as it is still dependent on investment.

It also said there was a need to manage inflation expectations, although prices were basically stable. China's inflation in 2013 was 2.6 percent, well below the bank's 3.5 percent target.

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